Doubling up

India’s ambitious plans to double the size of its economy to $5 trillion will mean local custodians will have an increasingly important role to facilitate increased activity from foreign portfolio investments (FPIs) and domestic investment vehicles such as mutual funds, insurance and AIFs. Vineet Potnis, head of custody services for Stock Holding, explains what India’s largest custodian is doing in preparation for this.
By Joe Parsons

Sponsored by StockHolding

As trade wars, global headwinds and Brexit continue to dominate sentiment around foreign investment flows, India is quietly working away to make itself an attractive option for international funds. The country has an ambitious target of growing its economy to $5 trillion, almost double its current size of $2.7 trillion, which will make it one of the top four economies in the world by 2024-25. 

India’s growth targets spell a significant opportunity for the country’s local custodians. Around $1.2 trillion of assets are held in Custody by local and agent banks, and it is expected that these assets would almost double within the next four to five years. 

Traditionally, assets under custody have been restricted to only large domestic companies such as banks, mutual funds and insurance companies, while pension funds are still not participating in capital markets in any big way,” says Vineet Potnis, head of custody services, StockHolding. “While the main growth drivers would be these segments, assets under custody from foreign portfolio investors (FPIs) are projected to grow from $400-500 billion to $800-900 billion”. 

At the same time, investors in India are maturing as they explore a wider range of asset classes. In the insurance and defined contribution segment, more are investing in the equity index markets. Inflows from foreign direct investment (FDI) into real asset and infrastructure projects are increasing, and even private equity and venture capital funds are entering the scene. 

As Indians become wealthier, alternate investment funds (AIFs) and family offices are increasingly preferred or even mandates in some cases to avail of custody services.  

What this means, according to Potnis, is the making of an expanding custody market with a wider variety of firms and investor segments in India that will need services. 

“At the macro level as India’s capital markets continue to develop, we will see global custodians compete regularly with local custodians. There is room for everyone; it also means that custodians would have to provide customised solutions backed by excellent service and address new age concerns related to data protection and security,” he adds. 

With these changes taking place, India’s financial regulators and policy makers are aware of the importance of FPIs in the Indian financial markets and are constantly reviewing policy initiatives to create a more favourable environment. 

“You also have interoperability with the clearing corporations where you have one clearer for your trades rather than arranging separate agreements for each exchange you use, therefore simplifying settlement. You now have one clearer and one set of margin requirements for all your trades across equity and derivatives asset classes. Recently, mutual funds, portfolio managers and AIFs have been permitted to participate in commodity derivatives through a custodian,” Potnis explains.

Meanwhile the IFSC at GIFT City, India’s offshore investment jurisdiction is actively encouraging all foreign investors through attractive policy initiatives, taxation benefits, globally preferred investment structure and regulation on par with other global IFSCs.

GIFT City is expected to be the main port of destination for foreign funds coming into India, in future and custodians are being encouraged to set up operations. Foreign investors hitherto routing their India investments will prefer GIFT IFSC over other global jurisdictions.

“Stock Holding has set up a subsidiary in GIFT City that offers trading, clearing and all related services to eligible investors at Gift City,” says Potnis.  

“There are now huge opportunities for local Indian custodians to scale their business, as new customer segments look for custodial services. Foreign players are very bullish on the Indian market, and it is high time for some of the bigger global custodians to come and set foot here.

“With trade wars and certain countries wanting to protect their turf, we find India is adjusting to this, improving its infrastructure, and making a more favourable-environment to attract international funds,” he concludes.